TMI Blog2020 (3) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... for the buyer to assemble or erect the plant from any other contractor without the supervision of the assessee and therefore, the buyer made its intention of getting the goods in a deliverable state of plant. The artificial division of composite contract into supply and service may be on paper but the conduct of the parties and terms and condition of the contract manifest that in substance it was a composite contract. The accounting practice followed for recognizing of revenue from service on completion of the project also support the intention of the parties to treat the erection of the plant as composite project. All the above terms and conditions of the contract cited by the Ld. DR, when read together clearly bring out the real nature and essence of both the contracts as part of one composite and turnkey works contract. Thus we hold that the Supply Service contracts represent a single, composite turnkey work contract. Income deemed to accrue or arise in India as per Section 9(1)(i) - whether the income from supply agreement is taxable in India? - In the instant case, the transit insurance of goods has been arranged by the assessee at its own cost from the ware house of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olated sale of the off the self goods or stray transaction, in view of the fact that the assessee has rendered supervision of erection/commission of TPD Plant. Thus, the assess is doing business activities in India which are not isolated instances but represent real and intimate relationship between activities of assessee done outside India and those done inside India. The business operation being done in India by the assessee are revenue generating as these operations are required to earn the contract and to meet the contractual obligations. Therefore, all parameters of business connection as prescribed by above judicial authorities are satisfied in the case of the assessee.Accordingly, the income is deemed to accrue or arise in India in terms of section 9(1)(i) of the Act from the offshore supply of goods. Existence of PE in India - We do agree with the observation of the Assessing Officer that there was close proximity or connection between the PE and the assessee. The Learned Assessing Officer is correct in observing that substantial part of the business activity of the assessee of manufacturing and commissioning of TPD plant was carried out in taxable territory of the Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it cannot take benefit that it was the responsibility of the deductor to deduct tax at source. In view of facts of the case being identical to the facts of the above case, we don t find any error in the order of the Assessing Officer on the issue in dispute. Accordingly, the ground No. 4 of the appeal of the assessee is dismissed. - ITA No.1077/Del/2014 - - - Dated:- 21-2-2020 - Shri O.P. Kant And Shri K.N. Chary, JJ. For the Appellant : Shri Ajay Vohra, Sr. Adv. Shri Akshay Uppal, CA For the Respondent : Shri G.K. Dhall, CIT(DR) (Intl. Taxation) ORDER O.P. KANT, J. The assessee has preferred this appeal against the final assessment order dated 02/01/2014, passed by the Deputy Director of Income Tax, Circle-2(2), International Taxation, New Delhi (in short the Ld. Assessing Officer ), in pursuant to the direction dated 27/12/2013 of Ld. Dispute Resolution Panel(DRP). The grounds raised in the appeal are reproduced as under: 1. That in the facts and circumstances of the case and in law, the order of Deputy Director of Income-tax (International Taxation), Delhi (A.O.) u/s 143(3) in pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the nature of Business Profits' not liable to tax in India, as per the provisions of DTAA between India and Austria read with the Act. (h) That the learned AO and DRP have grossly erred in holding that the assessee had a project office/branch office in India which constituted a PE. (i) That the learned AO and DRP have grossly erred in stating that alleged PE was involved in marketing activity in India without any basis. (j) That the decisions as relied upon by the learned AO are distinguishable, not applicable, on facts of the assessee. (k) That the learned A.O./DRP has erred in not following the decisions of Hon ble Supreme Court of India and Jurisdictional High Court in the following cases where, on similar facts, it has been held that consideration for supply of plant and equipment, from outside India, was not liable to tax in India. (i) Commissioner of Income Tax and Another Vs. Hyundai Heavy Industries Company Limited (291 ITR 482 SC); (ii) Ishikawajima - Harima Heavy Industries Ltd. - Vs. Director of Income Tax, Mumbai (228 ITR 408 SC). (iii) Director of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the same is not applicable on facts. 5. That the learned A.O. has erred in initiating penalty proceedings under section 271(1 )(c) of the Income-tax Act, 1961, the provisions of which are not attracted on the facts. 6. That the assessee may be allowed to add, supplement, revise, amend grounds as raised hereinabove. 2. Briefly stated facts of the case are that the assessee, M/s Voith Paper Gmbh (in short the Voith ) is a company incorporated under the laws of the Austria, having it registered office at Linzer 55, A-3100 St. Poeltran, Austria. The assessee company is one of the market leader in concept, technology, project planning, sale, engineering, processing, sourcing and marketing of board and packaging paper machines . 2.1 For the year under consideration, the assessee filed return of income on 28/03/2012 declaring nil income in status of a Non-resident Indian (NRI). In the return of income filed, the assessee declared its address as C/o Mohinder Puri Co. 1A-D Vandana Building 11, Tolstoy Marg, New Delhi. 2.2 The assessee had entered into two contracts on 19/06/2008 with the Century Pulp and Pape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,150 3 AY 2012-13 (FY 2011-12) 1,496,400 96,042,812 1,662,667 106,714,236 Total 3,445,200 214,627,608 3,828,000 238,475,120 2.4 The assessee has supplied the machinery parts in financial year 2009-10 (relevant to assessment year under consideration) and subsequent financial year. During the year under consideration, the assessee raised invoices for supply of components of machinery from 14th Sep., 2009 to 9th December, 2009 and shipped the containers through sea. The personnel of the assessee company visited from 14/12/2009 to 31/03/2010 for supervision of the erection, start up, training, commissioning and performance test of the TPD plant. 2.5 It was contended by the assessee that income in respect of off-shore supply of equipment was not taxable as per the provisions of the Income-tax Act, 1961 (in short the Act ) as well as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per article 7(1) of the DTAA between India and Austria, the profits of the enterprise attributable to the PE in India would be taxable in India. The AO computed the supply of machinery during the year at ₹ 472,97,97,680/-and in the show cause, he proposed that in offshore supplies segment, the role of PE was akin to distribution function i.e. the PE has first purchased the equipment /platform from the head office (HO) and then sold to Indian customer. According to the AO, the transaction of such purchase by and transfer of equipment to the PE was international transaction, which was not reported by the assessee for transfer pricing adjustment. The AO carried out benchmarking of distribution function of the PE and based on set of comparables, computed average margin for distribution services at 9.75 percentile. Accordingly, he proposed profit markup at average margin of 9.75 % on supply of ₹ 472,97,97,680/- which amounted to ₹ 46,11,55,273/-. 2.9 The assessee objected for considering the taxability of profit from supply of machineries made from outside India, as according to the assessee sale of Machinery was made outside India and the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... build, manufacture, supply, installation, testing and commission of machinery for TPD Plant. The supply of machines was necessary and incidental to design, manufacture, installation, testing and commission of above facility i.e. machinery for TPD Plant in India. It is not case of assessee that the contract was signed for supply of machines only and some technical work was required to be done as incidental to machines only and some technical work was required to be done as incidental to sale of equipments. Even though the assessee during the assessment proceedings, mentioned that the supply of machinery for TPD Plant and the installation and commissioning services are separate and independent of each other, a careful perusal of this document reveal that as per the terms and conditions of the contract the effective mandate given to the assessee is in the nature of composite contract . The purpose and intention of CPPC was to install a fully functional machinery for TPD Plant in working condition at the Airport and the assessee company was given this responsibility. Therefore, Respectfully following the above principle as laid down by Hon ble apex court, I am of considered view that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the finding that the contract for designing, engineering, manufacturing, shop testing and packing up to FOB port of embarkation could not be split up since the entire contract was to be read together and was for one complete transaction. It was in the said fact situation held that it was not possible to apportion the consideration for design on one part and the other activities on the other part. The price paid to the assessee was the total contract price which covered all the stages involved in the supply of machinery. In construing a contract, the terms and conditions thereof are to be read as a whole. A contract must be construed keeping in view the intention of the parties. In this case the intention of the assessee was to design, built, manufacture, commission, calibrate and operation of machinery for TPD Plant not the sale of trade items. In this context that these contracts under consideration are composite contract which could not be splitted to demonstrate FOB sale of equipments as separate activity Respectfully following the ratio decidendi of cited authority I am, of considered view that these contracts cannot be splitted to hold that sale of spares and equipment n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , drawing and equipment to Indian customer. It is proved from above discussion that all the three essential features of the business connection mentioned above are present in this case. Therefore, the income accruing or arising to the assessee by way of profit from design, manufacture, supply of machines, supervision of installation, testing and commissioning of machinery for TPD Plant to Indian customer shall be deemed to accrue or arrive in India u/s 9(1 )(i) of the Act and consequently same is taxable in India under domestic law in term of section 5(2) of the Act. 2.14 The AO also held existence of the PE in India and taxability under the DTAA between India and Austria. The DTAA has defined the PE as a fixed place of business through which the business of an enterprise is wholly or partly carries out. The existence of deemed PE in respect of supervision activities has not been disputed by the assessee in view of employees of the assessee were stationed at the CPPC TPD plant in the year under consideration for supervising the erection and commissioning of the TPD plant. The AO is of the view that the address mentioned in the return of income was at the disposal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, supply and supervision of installation, testing and commissioning of machinery for TPD Plant from the PE of assessee in India. The supplies of machinery for TPD Plant were a part of a composite contract. Accordingly, a part of the profit earned by assessee on supply was attributable to fix place of PE of assessee in India. 2.15 The AO also rejected the contention of assessee that Machinery for TPD plant were delivered outside India and thus no profit from offshore supply could be attributed to the PE of the assessee, observing as under: 18.4 The claim of assessee that machinery for TPD Plants were delivered outside India in Austria, accordingly no profit from offshore supply could be attributed to the PE of assessee in India. I have carefully examined the term and condition of agreement and have noted that the claim of assessee is factually incorrect. As per the terms and conditions of the agreement assessee has to deliver machinery for TPD Plant in running condition after completing supervision of the installation commissioning and testing. In such a condition assessee s contention that equipments are sold to CPPC in high seas cannot be anything b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the parties. c. The definition of these terms clearly indicates that the entire risk is borne by the supplier and carriage and insurance charges paid till their delivery at airport/ seaport in India. The repeated reference by the Assessee to Incoterms 2000 does not alter the situation because the expression by its very definition in the agreement means the obligation to bear the carriage and insurance charges upto airport/ seaport in India. It would be illogical to read that the parties particularly Century Pulp and Paper Company in India, can agree to the delivery at any airport/ seaport outside India. 19.2 In view of all the above referred clauses, if the agreement is read as a whole, the intent of the parties is clear that the title to the equipment passes in India at the site where the deliveries are made or in a worst scenario at the airports/seaports in India. 19.3 Under normal circumstances, the risk and title would go together. In the present case, the terms of the agreement read as whole and the conduct of the parties go to indicate that the documents submitted by assessee during the course of assessment like bill of lad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or final testing. The assessee has definite obligation to achieve this milestone and unless this is done the property cannot pass. Unlike other kinds of overseas supplies where the supplier has no other obligation beyond the point of shipment, in the present case, the obligation of the supplier extends to the geographical limits of India where he has to put the supply into a deliverable state. In the equipments being discussed in the present case, the various components are integral part of the wholesome technology and these cannot be viewed independently. 2.18 The AO also referred to section 41(1) and 41(2) of SGA , which provides that where goods are delivered to the buyer , which he has not previously examined , he is not deemed to have accepted them unless and until he has had a reasonable opportunities of examining them for the purpose of ascertaining whether they are in conformity with the contract. The AO finally observed in para 20 of the assessment order as title of the machinery supplied passed in India. The relevant para is reproduced as under: 20. A reading of the aforesaid sections of the Sale of Goods Act will show that where there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. All the transaction including supply of equipment offshore had taken place with the involvement of the PE of assessee in India. The above referred to factual matrix of this case that substantial part of the business activities of assessee of manufacturing and commissioning of machinery for TPD Plant were carried out in taxable territory of India and supply of machinery for TPD Plant was incidental to work contract and for this reason a part of profit on supply is directly attributable to the PE of assessee in India. 21.1 It is not case of a project where supervision services were required to fix up a plant and machinery i.e. technical services were incidental to sale of plant and machinery. In the case of assessee a contract was signed between assessee and CPPC to design, built, manufacture and supervision of erection and commissioning of machinery for TPD Plant in India and supply of machinery for TPD Plant were incidental to work contract and were essential requirement and were part of these machinery for TPD Plant. In other words supply of equipment was incidental to main business activity of assessee company providing technical services for design, bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the PE can be attributed. Profit from offshore supplies can be computed based on the assessee s global profitability after making certain adjustments for depreciation and provisions etc. Another method can be to estimate a percentage of gross amounts received as offshore supply. For this, the profit margins of some comparable companies doing similar activity can be adopted as a guidance and profits attributable can be worked out. 21.2 The assessee has submitted Global consolidated annual account which cannot be relied upon as it consolidates all the subsidiary companies accounts also. In absence of standalone annual account a profit of 9.75% (Profit margin estimated as per Para 7 above) is assumed as profit earned by the company and 35% of such profits are attributed to PE. With these remarks, the total income of the assessee is computed as under: Income as per return of income filed on 28.03.2012 - NIL Income from offshore supply Calculation of income from offshore supply Particulars FY 2009-10 Gross offs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee. 3.4 In this case, the assessee has entered into two contracts with CPPC , a division of M/s Century Textile and Industries Ltd: (a) Equipment Supply Contract dated 19/06/2008 -for engineering, designing, manufacturing, drawing and supplying of machinery for 620 TPD multilayer packaging coated board plant . (b) Service contract dated 19/06/2008- for supervision of erection, start-up, training, commissioning and performance test of said machinery. Both the above contracts have been signed in India on same date. 3.5 In the facts of the case, the contention of the assessee is that the supply of equipment is from outside India, which is only a offshore supply and no income corresponding to the same accrued or arisen in India in terms of Act. The assessee has refuted contention of the Income-tax authorities that contract of supply and contract of the service both constitute a composite contact for setting up of the TPD plant. The assessee has also contested that there was no fixed placed PE as far as supply contract is concerned and therefore no provisions of the DTAA are applicable for income from supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the following observations Provisions in the Contracts [ Pages are referred w.r.t. assessee s Paper Book for 2010-11] - Intention of the purchaser Whereas the Purchaser desires to Install a 620 TPD Multilayer Packaging Coated Board Plant ... [PB for 2010-11, p.157 186]and the assessee is committed to the success of the project . [15, p.179] - The term plant as used in the contract has a very wide ambit that includes in its sweep not only the machinery provided by supplier (3.1; p.162) but also the machinery otherwise procured by the purchaser (3.2; p.163)] to be erected on site. [p.160] - The term machinery also has a wide connotation that include supports, embedment etc. [3.1.2; p.162] - Examination of the nature of goods supplied under supply contract i.e. Press Section and Press Rolls [p.14, 36]; wire Section and Coating Section [p.19,36,45]; Dryer Cylinder [p.24 32]; Head Box [p.28]; Mechanical Drive [p.36,49]; MCS [p.36]; DCS [p.36]; MG Dryer [p.41]; Parts for Head Box [p.45]; Parts for Master Reel [p.45]; Control Cabinets [p.45]; QCS with CD Controls [p.45]; Air Dryin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... primacy of this Article/exercise can be gauged from the fact that the final acceptance of the goods supplied hinges upon the success of the performance warrantee test. Thus, as per Art-6 The machinery will not be deemed to have been formally finally acceptedby the purchaser until performance guarantees have been achieved..... After fulfillment of the performance guarantee, the purchaser will issue to the supplier a final acceptance certificate. [6.1, 6.2 6.3; p.166] Similarly, insufficient fulfillment of the performance guarantee parameters will liable the supplier for liquidated damages. [Art-15.2, p.173]If this is not sufficient, as per Art-7.3 of the General Terms of Contract If the supplier should commit a breach of non-fulfillment of the minimum performance guarantees........then the purchaser shall have the right to terminate the contract. [p.177] - The service contract, on the other hand specifically provides in the scope of services provision for personnel services for supervision of erection, start-up, training, commissioning and PERFORMANCE TEST(s) . [p.186, 191] Even though as per Art-6.1(a) of the Specific Terms Conditions of Contract provides that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g documents: (a) Supplier s monthly invoice (b) Copy of monthly time sheet issued by the supplier and countersigned by the purchaser. [cl.4.2; p.193] However, even though there is no provision of advance payment of remuneration /supervision fee payable under the Service contract the assessee itself, accounts for the supervision fee received under Service contract as advance received Work in Progress [p.95 to 97]under completion of contract method although it follows a Cash system of accounting. In the notes to the accounts for A.Y. 2012-13, the assessee states 3. The service contract dated June 19 2008 was completed on March 19, 2012 and PE in India ceased to exist after the said date. The completion certificate has also been received from CPP. Accordingly, the income earlier treated as Advance from Customer have now been offered to tax and cost earlier treated as WIP has been transferred to P L. 4(b) In relation to the agreement dt. June 19, 2008, companies personnel visited customer s site and as per the number of days visited and duration of the contract, PE came into existence in terms of provisions of DTAA between India and Germany. Completed contract method has been f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beginning is installation of Multilayer Packaging Coated Board Plant under supervision of the assessee. As the assessee was also specialized in manufacturing of equipment required for setting up of TDD Plant, the assessee was involved in supply of the same. The Plant in itself is not a set of machinery only but the contractor was required to construct a facility of manufacturing the products of the buyer. The various machineries supplied like Press section , Press rolls , Wire section , Coating section , Dryer section etc. are kind of components of the Plant to be constructed or erected under the supervision of the assessee. These goods in itself are components of plants, which has been delivered by the assessee. The intention of the parties was to provide to the buyer a plant in deliverable state which is also clear from the other terms of contract like date of completion of delivery as last date of delivery of last consignment, provision of monthly progress report both in supply and service contract, performance warrantee clause. The final acceptance of the supply of goods was dependent on the success of performance warrantee test. The service contract has a provision of te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for work and labour not involving the sale of goods; and the third was held to be a contract of sale where the goods were sold as chattels and the work done was merely incidental thereto. 5.3 The AO has held that supply of machinery was incidental to the erection and commission of the plant. The relevant paragraph is reproduced as under: 11. I have examined facts of this case along with the ration decidendi above referred to judgment of Hon ble Supreme Court and have noted that dictum of law for second category of contract (ii) as discussed above is squarely applicable to the identical facts of the case under consideration. In this case assessee had entered into a contract with CPPC to design, build, manufacture, supply, installation, testing and commission of machinery for TPD Plant. The supply of machines was necessary and incidental to design, manufacture, installation, testing and commission of above facility i.e. machinery for TPD Plant in India. It is not case of assessee that the contract was signed for supply of machines only and some technical work was required to be done as incidental to machines only and some technical work was required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 2 to Section 9(1). Having considered the submissions made at the Bar, we are of the opinion that it is not possible to apportion the consideration for design on the one part and engineering, manufacturing, shop testing, packing up to f. o. b. port of embarkation. In that view of the matter, in our opinion, the transfer of design, if any, vis-a-vis other would not come within the purview of the said Explanation. This aspect of the matter is covered by a Division Bench judgment of the Madras High Court in the case of CIT v. Neyveli Lignite Corporation Ltd. [2000] 243 ITR 459, 463, where it was held as under : In a contract for the design, manufacture, supply, erection and commissioning of machinery which does not involve license of the patent concerning the machinery, or copyright of its design, mere supply of drawings before the manufacture is commenced to ensure that the buyer's requirements are fully taken care of and the supply of diagram and other details to enable the buyer to operate the machines, and also to assure the buyer, that the machines will perform to the specification required by the buyer, such supply is only incidental to the performance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of Hon ble SC in the case of State of Karnataka v. Bangalore Soft Drinks P. Ltd. (2000) 117 STC 413 (SC), where the Hon ble SC held that In turn-key projects, more particularly of the kind involved in this batch of Writ Petitions, the same person has been entrusted with the responsibility of procuring material, and of erection and installation of equipment. While in-built safeguards are provided in all the contracts to ensure quality of the material, and effective performance of the erection contract, the supply contracts, in substance, do not absolve the petitioners-contractors of their obligations of erection and installation of equipment after the goods are sold by them to the owner. The petitioners-contractors' obligations, under both the supply and erection contracts, cease only after the turn-key project becomes operational, and after final payment is made both for supply of material and for erection and installation of equipment. 5.6 Similarly, the Hon ble Andhra Pradesh High Court again quoted Hon ble SC in the case of Indure Ltd. v. CTO (2010) [2010-TIOL-79-SC-CT] and observed that 32. The goods supplied to the owner, under the supply contracts, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsonal of the assessee coincide and run concurrently. 5.9 The Tribunal in the case of Shanghai Electric Group Co. Ltd. vs. DCIT in ITA No. 224 to 227/Del/2015 and Others has held that for two contracts to be composite one, dominant nature of an agreement should be seen. The Tribunal referred to the decision of the Hon ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. Vs. Union of India (2006) 3 STT 245 45. The relevant paragraph of the order of the Tribunal is reproduced as under: 215. Hon'ble Supreme Court's observation in the case of Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 are relevant Shanghai Electric Groups Co. Ltd. Vs. DCIT ITA No. 224 to 227/Del/2015 ITA no. 3552/Del/2015 ITA No. 58 59/Del/2017 to understand the dominant nature of an agreement . The relevant portions of the same has been extracted herewith: The reason why these services do not involve a sale for the purposes of Entry 54 of List - II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley case, namely, if there is an instrument of contract which may be composite in form in any c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the applicant accrued in India. 5.11 In view of the above, we hold that the Supply Service contracts represent a single, composite turnkey work contract. Income deemed to accrue or arise in India as per Section 9(1)(i) of the Act: 6. The next issue in the case is whether the income from supply agreement is taxable in India. As per section 9(1) of the Act income accruing or arising form any busness connection in India is deemed to accruing or arising in India. The relevant part of the section is reproduced as under: 9. (1) The following incomes shall be deemed to accrue or arise in India :- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. 6.1 The assessee has objected the business connection on the ground that Sale of the property has been made from outside India and thus offshore supply is not taxable in India as per section 9(1)(i) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract) to the offshore supply contract, available on page 166-168 of the paper book and submitted that it specifies contract price amounting to EURO 68,498,800, which was payable in foreign currency. The relevant extract of article 8 of the offshore supply contract reproduced as under: 8. Price 8.1 Price for the supply as per Scope of Supply as per Article 3 shall be Euro 68,498,800/- composed as follows: a) Machinery and equipments Euro 6,17,22,800 b) Spares Euro 67,76,000 Total Euro 6,84,98,800 9. Terms and mode of Payment . 9.6The payment stated under Article 9.1.2 shall be made through an irrevocable Letter of Credit to be opened by the PURCHASER in favour of the SUPPLIER within 30 (thirty) days after signing of the CONTRACT, which shall be valid until 1 (one) month beyond the contractual FOB delivery time. The Letter of Credit shall allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars Ishikawajima s case Appellant s case Title transferred in favour of Buyer outside India at the port of shipment of equipments materials Yes Yes Consideration for offshore supplies receivables in foreign currency Yes Yes Buyer named as insured/co-insured Yes Yes 6.8 The Ld. counsel submitted that the ratio of the above decision applies over the fact of the instant case because in view of the provisions of the sales of goods Act, 1930 (SG Act) , the property in equipment supplied by Voith ( i.e. the assessee) to CPPC was transferred in favour of CPPC, when the equipment was unconditionally appropriated to the contract or in other words when the equipment was dispatched for transmission to CPPC. The Ld. counsel submitted that in view of the facts of the case, the equipment was sold by the Voith outside India and the entire activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ratio of the following decisions: (i) DIT Vs Ishikawajma-Harima Heavy Industries Ltd 288 ITR 408 (SC) (ii) CIT and Anr Vs Hyundai Heavy Industries Co.Ltd (2007) 291 ITR 482 (SC) (iii) DIT Vs LG Cable Ltd (2011)237 CTR 438 (Delhi) (iv) Hyosung Corporation (AAR No. 773 of 2008) further affirmed by the Hon ble Delhi High Court [WP(C) No. 2765/2010 and CM No. 5515/2010] 6.12 On the other hand, the Ld DR submitted that an identical issue involving the transfer of title to the property and risk was before the ITAT in the case of Baker Hughes Asia Pacific Ltd. [2014-TII-104-ITAT-DEL-INTL] where the ITAT had an occasion to consider a gamut of decisions including the decisions of Hon ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. [Supra], DIT Vs. L.G. Cables Ltd.(SC) [2011-TII-02-HC-DEL-INTL], CIT Vs. Hyundai Heavy Industries(SC) [2007-TII-02-SC-INTL], DIT Vs. M/s Nokia Networks OY [2012-TII-49-HC-DEL-INTL] and Skoda Export v. Addl. CIT [2003-TII-34-HC-AP-INTL].The ITAT after considering the above decisions of Hon ble Supreme Court that of Hon ble Delhi AP High Courts as well as that by the Sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court s decision in the case of L T Ltd. [2015-TIOL-3055-HC-AP-CT which has followed the decision of Hon ble Supreme Court in the case of Usha Belltron Ltd. v. State of Punjab (2005) 7 SCC 58. 7. We have considered the rival submission of the parties on the issue in dispute. We find that Hon ble Supreme court in the case of DIT Vs Ishikawajma-harima Heavy Industries ltd (supra) has held that signing of contract in India was of no material consequences while determining taxability of offshore supply of equipment since all the activity in connection with such supply were undertaken outside India and could not, therefore, be deemed to accrue or arise in India. The Hon ble Delhi High court in the case of DIT Vs. Ericson AB (supra) has held that the place of negotiation, the place of signing of agreement or formal acceptance thereof or other responsibility of the assessee were irrelevant consideration for determining taxability of offshore supply of equipment. The relevant extract of the decision is reproduced as under: 44. The aforesaid analysis will bring forth the legal position that the place of negotiation, the place of signing of agreement, or form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r quality and performance of the equipment should not be construed as a condition which postpone the transfer of the title in goods till that time. The Hon ble Delhi High Court in the case of DIT Vs LG Cable Ltd., 237 CTR 438 held that buyer s right to examine and repudiate the goods in law does not indicate the property in goods has not passed. 7.3 The contention of the assessee is that sale of goods has taken place outside India in view of the intention of parties as reflected in various clauses of agreement particularly article 7.1 of the Appendix -A, Bill of lading in the name of the purchaser and commercial invoice in the name of the purchaser. In all the decision, common thread is that title in property and risk to buyer is passed at a time when parties to contract intend it to transfer. 7.4 According to section 19(1) of the Sale of Goods Act, 1930 (SG Act) the property is transferred to the buyer at such time as the parties to the contract intended to be transferred. Further the section 19(2) specifies that for the purpose of ascertaining the intention of the parties, regard shall be given to the terms of contract, conduct of the parties and circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the property in the goods thereupon passes to the buyer. Such assent may be expressed or implied, and may be given either before or after the appropriation is made. (2) Delivery to carrier-Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee (whether named by the buyer or not) for the purpose of transmission to the buyer, and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract. Section 26: Risk prima facie passes with property:- Unless otherwise agreed, the goods remain at the seller s risk until the property therein is transferred to the buyer, but when the property therein is transferred to the buyer, the goods are at the buyer s risk whether delivery has been made or not .. 7.5 We find that though in the instant case, the Article 7.1 (supra) specifies that the ownership and risk of the equipment supplied under the offshore supply contract would be transferred in favour of the buyer outside India at the port of shipment. But when we examine the intention of the parties from various clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The repetition of such tests run(s) shall be carried out with the same procedure as mentioned In this article. Expenses for SUPPLIER'S personnel for the second test run(s) shall be borne by SUPPLIER. 4.2.4 If the second test run(s) during the second period of 3 (three) months are also unsuccessful due to SUPPLIER S fault, both parties will mutually decide which further steps shall be made in order to solve the problems related to the performance warrantee(s). 4.2.5 In case there is some disruption in the course of the first Warrantee test run(s) in provision of items under Article 4.2.6 hereinafter by PURCHASER for reason beyond their control, PURCHASER shall be given a maximum of (6) six weeks time from the date of receipt of the above mentioned notice for warrantee tests to fully comply with the requirement of Article 4.2.6 hereinafter, In this case, the second or third Guarantee test run(s) will be held on a mutually agreeable date, the expenses for the SUPPLIER S personnel shall be borne by the PURCHASER. 4.2.6 The above performance warrantees are subject to the conditions and pre-requisites mentioned in Annexure-III ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of slight defect, the PURCHASER with SUPPLIER'S authorization and instruction may adjust the same. The relevant material cost shall be to the SUPPLIER'S account and the relevant labour cost In India shall be to the PURCHASER'S account Materials required to meet the performance guarantees and contractual obligations during warranty period - If attributable to the SUPPLIER, shall be arranged by the SUPPLIER free of cost, all freight and duty paid. 7.9 The final acceptance of the machinery was subjected to the final acceptance test only. The relevant clause of the agreement available on page 166 reads as under: FINAL ACCEPTANCE 6.1 During the performance guarantee test as stipulated in this CONTRACT, the 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT will be operated by and under the supervision of PURCHASER according to the operating instructions issued by SUPPLIER. The MACHINERY will not be deemed to have been formally finallyaccepted by the PURCHASER until performance guarantees are achieved, the liquidated damages have been paid or waived, or the performance guarantees have been deemed fulfilled as set out below. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per the provisions of section 5 of the Act, the total income of a nonresident includes income which is received or deemed to be received in India or which accrues or arises, or is deemed to accrue or arise to the nonresident in India. Arguably, a sale undertaken by a non-resident to a resident outside India should not be subject to tax in India. However, the Act does not define what constitutes sale made outside India or in India. Therefore, guidance could be sought from judicial pronouncements. The Supreme Court has held that whether a sale has been made in India or outside India would depend upon the facts of the case. For instance, the apex court has held that in case the bill of lading accompanying the goods is in the name of the of the Indian buyer, then the transaction is complete in the sellers' count , and the delivery of goods, and the sale, is deemed to have taken place outside India. However, if the seller retains control over the goods by taking the bill of lading in his own name, the delivery and sale could be said to have taken place in India. ...sale of goods on a CIF basis does not necessarily imply that sale As concluded in India . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement is read as a whole, the intent of the parties is clear that the title to the equipment passes in India at the site where the deliveries are made or in a worst scenario at the airports/seaports in India. 19.3 Under normal circumstances, the risk and title would go together. In the present case, the terms of the agreement read as whole and the conduct of the parties go to indicate that the documents submitted by assessee during the course of assessment like bill of lading, invoices, import documents etc. do not demonstrate the true intent of the parties. This condition of the supply cannot be met it The goods are delivered on High seas The full satisfaction can be reached only in India after the provisional acceptance. One cannot pick up one part of supply obligation and contend that the title has passed with the discharge of that obligation. Incoterms 2000 only refer to the terms of the agreement generally acceptable between the contracting parties with regard to obligation to bear the cost of transportation, insurance till the point of delivery. Thus, if the agreement is viewed as a whole, it demonstrates that the supplier has the obligation to deliv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Acceptance of goods by buyer - Contract of Sale is completed not by mere delivery of goods but by acceptance of goods by buyer. Acceptance does not mean mere receipt of goods. It means checking the goods to ascertain whether they are as per contract. - Where goods are delivered to the buyer which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract. [Section 41(1)] 19.6 Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. [Section 41(2)] 19.7 It is necessary to decide whether property in goods has been transferred to buyer to determine rights and liabilities of buyer and seller. Generally, risk accompanies property in goods i.e. when property in goods passes, risk also passes. 19.8 It is seen that title of all Equipment sold was to pass from suppliers in high sea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibed in the ANNEXURE I, - Head Boxes and Forming Section - Press Section - Drying Section - Surface Sizing and On-line Coating Stations - Air Drying System - Hard and Soft Nip Calendaring - Pope Reel - Machine Control System - Automation and Controls - Auxiliaries and Accessories - Spares 3.1.2 The SUPPLIER S Scope of Supply shall be as specified In Annexure I, MACHINERY shall be complete within the delivery limits of SUPPLIER S scope of supply in order to achieve the performance guarantees subject to the conditions as per Annexure III in every respect with all mountings, fittings, fixtures and standard accessories normally provided with such MACHINERY and / or needed for completion and safe operation of the MACHINERY including supports, embedment etc, as required by the applicable codes, though they may not have been specially detailed in the respective specifications unless included in the list of exclusion. All similar standard components/parts of similar standard equipment provided shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee, a Swedish company, entered into contracts with ten cellular operators for the supply of hardware equipment and software. The contracts were signed in India. The supply of the equipment was on CIF basis and the assessee took responsibility thereof till the goods reached India. The equipment was not to be accepted by the customer till the acceptance test was completed (in India). The assessee claimed that the income arising from the said activity was not chargeable to tax in India. The AO CIT (A) held that the assessee had a business connection in India u/s 9(1)(i) a permanent establishment under Article 5 of the DTAA. It was also held that the income from supply of software was assessable as royalty u/s 9(1)(vi) Article 13. On appeal, the Special Bench of the Tribunal (Motorola Inc 95 ITD 269 (Del)) held that as the equipment had been transferred by the assessee offshore, the profits there from were not chargeable to tax. It was also held that the profits from the supply of software was not assessable to tax as royalty . 229. On appeal to the High Court, Hon'ble Court dismissed Revenue's appeal by observing as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supply and installation are the responsibilities of one party i.e. assessee; Description of goods supplied as per invoice [p. 13 to 66 of Paper Book for A Y. 2010-11 and p.143 to 146 of Paper Book for A Y 2011-12] revel that they are only parts of the machinery which need to be assembled, erected and installed. This is consistent with Cl. 13.1 13.5 of the Supply Contract which state that Machineries to be delivered in part shipments and the date of completion of delivery is the date of delivery of the last consignment ; The supply and installation process overlap with each other. The supply of such machine parts continued through both the relevant assessment years alongside installation services. Thus, whereas it is claimed by the assessee that installation services commenced from 14-12-2009 with the arrival of Mr. A.C.Schwab on 14.12.2009 and continued till A.Y. 2012-13, the supply of machine parts continued till at least 6.5.2010 [p.143 of Paper Book for 2011-12. In fact, the value of supplies during A.Y.2011-12 was ₹ 6,30,75,828. In other words, since as per cl. 13.5 of the supply contract, the date of completion of delivery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable state in India as per supply agreement and thus sale cannot be said as effected outside India. In the case of Ericson AB (supra) the contract of erection was executed by subsidiary company and thus the Hon ble court held that both the entity perform their own independent obligation, receive appropriate separate remuneration and are technically not dependent on each other. But in the instant case, both the contract of supply and supervision of installation or commissioning of plant has been executed/supervised by the one party, i.e., the assessee. 7.22 The learned counsel has referred to the decision of Nokia Networks OY (supra), where in the Tribunal has held that mere provisioning of marketing activities does not lead to creation of a business connection. The relevant extract is reproduces as under: 53 ...... Theprovisions ofsection 9(l)(i) of the Act clearly provide that income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndication to that effect in the statute, the place where the documents are transferred is not necessarily the place of the sale. (S.R. Sarkar106). Transfer of documents of title may be effected by handing them over. An endorsement to that effect on the documents is one mode of proving the fact. (The Dy. Commissioner of Commercial Tax, Madurai Division, Madurai v. A.R.S. ThirumeninathaNadar Firm, Tuticorin (1968) 21 STC 184) (Madras HC) (DB)). 94. ...in addition to post-despatch inspection, the supply contracts (as opposed to the erection contracts) also contemplate a certification after erection; by virtue of the said clause, the owner certifies as to the successful operation of the facility; the said certification is given after the owner inspects the facility, and finds that all the units and components, which have been supplied, are working; the scope of certification extends not only to the civil work, but also to the goods supplied under the supply contract; in all the contracts, the supplier becomes entitled to full payment only upon receipt of such certification; the payment is linked to successful inspection and certification; if the contract has an inspecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inspection or a certification clause, the unconditional appropriation, ordinarily, takes place, and the assent of the buyer is also given, only upon inspection and certification. Under Section 24 of the 1930 Act title passes upon approval which, in the subject contracts, is only after inspection. The post-delivery inspection clauses in the subject contracts would fall within the ambit of the phrase on approval in Section 24 as delivery of the goods is taken only after inspection. The taking over certificate also shows that the buyer indicates his approval only after certification. The inspection and certification clauses in the contract would fall within the ambit of the phrase other similar terms in Section 24. The presence of an inspection and certification clause in the supply contract defers passing of title till the owner has expressed its assent. Such assent is given only after inspection and certification. 99. Section 26 stipulates that risk, prima-facie, passes with the property and, thereunder, unless otherwise agreed, the goods remain at the sellers risk until the property therein is transferred to the buyer, but when the property therein is transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ITAT, Delhi in the case of Shangahai Electronics Group Company Ltd. [2017-TII-119-ITAT-DEL-INTL] where the ITAT held the income from overseas supply to be taxable in India. 7.27 In view of the discussion, we are of the view that the assessee has supplied parts of goods by way of invoices raised,which have further been assembled in India to bring them in deliverable state as agreed in the supply agreement between the assessee and buyer , and thus property in goods have been passed in India and thus part of the consideration of supply agreement for offshore supply is taxable in India. We note that no information has been provided by the assessee in respect of the activity carried out in India subsequent to award of the tender to the assessee for collection of drawing of the factories of the buyer and other input information in relation to erection of plant and customized manufacturing of the parts of various section of the plant. (b) Business connection in India 8. The concept of Business Connection basically envisages a relationship between the business carried on by a non-resident yielding profits or gains, on the one hand and some act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression 'business connection' and its precise connotation is vague and indefinite. The expression 'business connection' undoubtedly means something more than 'business'. A business connection in section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the nonresident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very on board. The engine was agreed to be erected by the staff of the purchaser under the supervision of the erector and a supervising engineer was placed at the disposal of the purchaser by the non- resident company. 8.7 It was held that; business connection can be said to be established when the thread of mutual interest runs through the fabric of the trading activities carried on outside and inside the taxable territory and there must be real and intimate connection between the two. The commonness of interest may be by way of management control or financial control or by way of sharing profits . 8.8 Having regard to the facts of the said case, the Hon'ble Court held that there was no business connection between the assessee and non-resident company, as the services rendered by non- resident company were connected with the effective fulfillment of the contract of sale and were merely incidental to the contract. The ratio decidendi emanating from the aforesaid decisions is that the following conditions should exist to constitute Business Connection in India: A real and intimate relation must exist between the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offshore supply of goods. Existence of PE in India 9. The Article-5(1) of the DTAA between India and Austria has defined the Permanent Establishment means a fixed place of through which the business of an enterprise is wholly or partly carried on. The article 5(2) further include following places as permanent establishment: ARTICLE 5 : Permanent Establishment - 1. 2. The term permanent establishment includes especially:- (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a sales outlet; (h) a warehouse in relation to a person providing storage facilities for others; (i) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (for the same or connected project, site or activities) continue for a period of more than six months. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring of the machinery, which is evident from the fact that the assessee company has no office or manufacturing facilities in India. The learned Assessing Officer rejected the contention of the assessee, observing as under: 18.4The claim of assessee that machinery for TPD Plants were delivered outside India in Austria, accordingly no profit from offshore supply could be attributed to the PE of assessee in India. I have carefully examined the term and condition of agreement and have noted that the claim of assessee is factually incorrect. As per the terms and conditions of the agreement assessee has to deliver machinery for TPD Plant in running condition after completing supervision of the installation commissioning and testing. In such a condition assessee s contention that equipments are sold to CPPC in high seas cannot be anything but a tax avoidance scheme. When assessee is required to have possession of the goods at the work site for supervision of installation, the passing of possession in high seas to CPPC and again taking it back at the site is highly illogical. No purpose other than tax evasion can be served from this transaction. Further there is no document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished despite repeated requests by AO. The AO vide letter dt. 22/2/13 asked the assessee to explain pre-contract details i.e. how you are chosen for the referred work with reference to the tender modalities. In response, the assessee vide its reply dt. 13/3/13 [p.83 of Paper Book] stated that Regarding pre-contract details, we are awaiting the same from the assessee. As and when the documents are received, we shall submit the same with your goodself. The assessee again vide its letter dt. reply dt. 19/3/13 sought time on the ground that In respect of pre-contract documents, we would like to inform you that the assessee is in the process of collecting the same. However, these are old records, the assessee may take some more time to organize the relevant documents and information. Therefore, we request your goodself to give some more time to the assessee for submitting these details/documents. The assessee, once more vide its reply dt. 25/3/13 [p.91 of PB] contended that Regarding the information of the expatriates of the assessee who visited India in respect of the contract with Century Pulp Paper Mills Ltd., we would like to inform your goodself that due to Easter hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1A-D, Vandhana Building, 11 Tolstoy Marg, New Delhi It may be noted that this address is different from the site office at Lalkua, Nainital, UP [p.94] which constitutes the Supervisory PE. It cannot be said that the above address at New Delhi is not a geographically fixed place. Since, as per the Tax Audit Report, [p.34, PB 2011-12] it has been certified that the books of accounts of the assessee are being maintained at this premises, it can t be said that the premises are not at the disposal of the assessee. It may not be out of context to state that Hon ble Delhi High Court in the case of Galileo International Inc. Travelport [19SOT 257] have upheld fixed place PE on the basis of existence of computer terminals. Accordingly, maintenance of books of accounts at a fixed geographical location satisfies the disposal, location and business tests for the existence of a Fixed Place PE. The temporal aspect of the PE or permanency test is also satisfied as the AO in para-18.2 in page 24 of his order has given a finding that The returns of the assessee are being filed in India since last many years and in all the returns the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd filing its income tax return in India for the past many years, with the address stated as 1A-D, Vandhana Building, 11 Tolstoy Marg, New Delhi , the aforementioned address constitutes fixed place of business from where activities of supply of equipment took place. Re: Pre-contract activities not relevant to constitute fixed place PE As regards the allegation of the Ld. CIT(DR) with respect to nonfurnishing of pre-contract activities before the lower authorities, it is respectfully submitted as under: The appellant, being a company resident in Austria, is entitled to the treaty benefits under the Double Taxation Avoidance Agreement between Austria and India ( the Treaty ). Article 7 of the Treaty dealing with taxation of business profits , reads as under: ARTICLE 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manent establishment of goods or merchandise for the enterprise. 5. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year-by-year unless there is good and sufficient reason to the contrary. 6. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. In terms of paragraph 1 of Article 7 of the Treaty, business profits arising to a French enterprise shall be taxable in India, only if the Austrian enterprise has a PE in India. In other words, in the absence of a PE in India, no part of the business profits arising to French enterprise is taxable in India. Article 5 of the Treaty defines PE as under: ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term permanent e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place of business through which the business of an enterprise is wholly or partly carried on , is similarly worded as paragraph 1 of Article 5 of the OECD Model Convention. The OECD Commentary on Article 5 of the OECD Model Convention, states that the following conditions should exist in order to constitute fixed place of business for the purpose of paragraph 1 of that Article: the existence of a place of business , i.e., a facility such as premises or, in certain instances, machinery or equipment. this place of business must be fixed , i.e., it must be established at a distinct place with a certain degree of permanence. the carrying on of the business of the enterprise through this fixed place of business. This usually means that persons who, in one way or another, are dependent on the enterprise(personnel) conduct the business of the enterprise in the State in which the fixed place is situated. It is further submitted that the DTAAs characterize a fixed place of business as PE only if the enterprise undertakes a business activity through the place of business. This is referred to as the business acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f an enterprise is wholly or partly carried on. Some examples offixed place are given in Article 5(2), by way of an inclusion. Article 5(3), on the other hand, excludes certain places which would not be treated as PE, i.e. what is mentioned in clauses (a) to(f) as the 'negative list'. A combined reading of sub-articles (1), (2) and (3) of Article 5 would clearly show that only certain forms of establishment are excluded as mentioned in Article 5(3), which would not be PEs. Otherwise, sub-article (2) uses the word 'include' which means that not only the places specified therein are to be treated as PEs, the list of such PEs is not exhaustive. In order to bring any other establishment which is not specifically mentioned, the requirements laid down in subarticle (1) are to be satisfied. Twin conditions which need to be satisfied are: (i) existence of a fixed place of business; and (b) through that place business of an enterprise is wholly or partly carried out. It may also be pointed out that the Delhi High Court in the case of CIT vs. eFunds IT Solution and Ors.: 364 ITR 256 while deciding the issue as to whether outsourcing of services to an Indian affil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vities which have a preparatory or auxiliary character. The provisions of Article 5(4) of the Treaty are designed to prevent an enterprise of one Contracting State from being taxed in the other Contracting State, if it uses facilities solely for the purpose of collecting information for the enterprise or carries on in that other State, activities of a purely preparatory or auxiliary character. It is recognized that the services performed by such a place of business are so remote from the actual realization of profits, that it is difficult to allocate any profit to the fixed place of business. The facilities and activities enumerated in the list of exceptions to PE concept do not constitute PE, even if all the requirements for constituting fixed place PE as provided in Article 5(1) areotherwise satisfied. The list refers to activities of a preparatory or auxiliary character, such activities being exempted from PE taxation. This Authority for Advance Rulings, in the case of UAE Exchange Centre: 268 ITR 9,further affirmed by Delhi High Court in 313 ITR 94 (Del.)] held as follows: ... the word auxiliary in common English means hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fixed place of business once an Assessee commences its work at site. Thus, for clause (h) of paragraph 2 of Article 5 to be applicable, it is essential that the work at site or the project commences - it is not relevant whether the work relates to planning or actual execution of construction works or assembly activities . 37. In the present case, the Assessee claims that the survey was conducted by an independent third party engaged by the Assessee and that too for a period of 9 days in one instance and 27 days in another (from 27.02.2006 to 07.03.2006 and 25.04.2006 to 21.05.2006). The Assessee commenced its activities at site when the barges entered into the Indian Territory on 19.11.2006 and such activities relating to the installation, testing and commissioning of the platforms continued till 27.04.2007. Thus, the Assessee's activity at site would indisputably commence on 19.11.2006 and continue till 20.04.2007, that is, for a period of less than nine months. Reference is further made to the decision of the Delhi Tribunal in the case of Bellsea Ltd vs. ADIT: 98 taxmann.com 489 (Del. ITAT) wherein the assessee was engaged in the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re entering into contract cannot be counted while calculating the threshold period. Situation would be different if after the contract/work has been awarded/assigned and then if any kind of active work of preparatory or auxiliary nature is carried out, it could be counted for determining the time period. Reference is further made to the decision of the Special Bench of the Tribunal in the case of Motorola vs. DCIT: 95 ITD 269 (Del.) wherein the Tribunal held that the basic operations to be carried out before the business actually starts such as market survey, industry analysis, economy evaluation, furnishing of product information, ensuring distributorship and their warranty obligation, ensuring technical presentations to potential users, development of market opportunities, providing services and support information, procurement of raw materials and accounting and finance services etc. are activities of preparatory or auxiliary character before the commencement of actual business in India. Such activities cannot be considered as activities in the course of the carrying on of the business by a foreign company in India and the same are anterior thereto. Relevant extra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quipment or price of equipment. (3) Develop market opportunities for Motorola products and services by introducing Motorola products and services and by providing product and service information to potential customers and partners in liaison and support of Motorola and provide warranty and after sales services in connection with the products sold. (4) Engage in sourcing and procurement activity on behalf of Motorola for raw materials or components to be incorporated or used in conjunction with products manufactured on a worldwide basis. (5) Corporate Finance and Accounting Services. On the basis of above clauses in the Services Agreement, it is contended that the activities of MINC are only preparatory or auxiliary in character and, therefore, the office of MINI in India cannot be deemed to be a fixed place PE of the assessee. 224. We see force in the contention, taken in the alternative. The activities described in the clauses of the Services Agreement do show that they are basic operations to be carried out by MINL before the business actually starts such as market survey, industry analysis, economy eva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) who were engaged by the appellant for preparing the books of accounts and for undertaking tax compliances in respect of onshore activities (supervisory activities) undertaken by the appellant in India. The address of the Chartered Accountant was mentioned in the return of income and Form 27A merely for administrative convenience and to communicate with Indian tax authorities and the Chartered Accountant firm has no role in the business of the appellant company. It is respectfully reiterated that the all activities involved in supply of equipment viz. designing, manufacturing etc. were carried out outside India and the same were not carried out in India in any manner, much less from the premises of MPCO. The aforesaid premises of MPCO can, by no stretch of imagination, be construed as a fixed place of business of the appellant in terms of Article 5(1) of the India-Austria Double Taxation Avoidance Agreement ( the Treaty ) which defines the term permanent establishment (PE) to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. As explained earlier, a fixed place of business/PE is constituted only if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India. Be that as it may, as per terms of Equipment Supply contract, i.e., Article 7.1 and the import documents such as bill of lading, etc., it is abundantly clear that the ownership in the goods passed outside India. It is further submitted that the activities relating to design and manufacturing were carried out outside India and the supervisory PE of the appellant, which came into existence on account of number of days for which appellant s employees stayed in India, had no role whatsoever in the design, fabrication and manufacture of the equipment, which is substantiated by the fact that the applicant has no office or manufacturing facilities in India. No evidence has been submitted by the Ld. CIT(DR) in support of this unsubstantiated, bald allegation which is based wholly on conjectures and surmises. Further, it needs to be appreciated that since the activities relating to offshore supply were completed by the appellant much before the supervisory PE came into existence, the Ld. CIT(DR) has grossly erred in stating that all the transactions including offshore supply of equipment were undertaken in India. In this regard, reference is made to the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the PE. There is one more reason for coming to the aforestated conclusion. In terms ofpara (I) of Article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the PE would have earned if it was wholly independent of the GE. Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the PE in India) and even if we assume that the supplies were an integral part, still no part of profits on such supplies can be attributed to the independent PE unless it is established by the Department that the supplies were not at arm's length price. No such taxability can arise in the present case as the sales were directly billed to the Indian Customer (ONGC). No such taxability can also arise in the present case as there was no allegation made by the Department that the price at which billing was done for the supplies included any element for services rendered by the PE. In the light of our above discussion, we are of the view that the profits that accrued to the Korean GE for the Korean operations were not taxable in India. 12. There is one more aspect to be discussed. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les and marketing of GE's product through its various group companies, in several segments of the economy (gas and energy, railways, power, etc.) was not simple. As noticed by the tribunal, entering into contract with stakeholders (mainly service providers in these segments) involved a complex matrix of technical specifications, commercial terms, financial terms and other policies of GE. To address these, GE had stationed several employees and officials: high ranking, and in middle level. At one end of the spectrum of their activities was information gathering and analysis- which helped develop business and commercial opportunities. At the other end was intensive negotiations with respect to change of technical parameters of specific goods and products, which had to be made to suit the customers. Standard off the shelf goods - or even standard terms of contract, were inapplicable. In this setting, a potential seller of equipment - like GE, had to create intricate and nuanced platforms to address the needs of customers identified by it, in the first instance. After the first step, of gathering information, GE had to commence the process of marketing its product, understanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the PE and the assessee. The Learned Assessing Officer is correct in observing that substantial part of the business activity of the assessee of manufacturing and commissioning of TPD plant was carried out in taxable territory of the India and supply of parts of machinery for plant was incidental to service contract and for this reason a part of the profit is directly attributable to the PE in India. In the facts of the case the supervision services are not incidental to sale of the plant and machinery and it is otherwise that for commissioning of the plant, assessee has brought component of the machinery to India under supply agreement. It is not the case that the assessee is a pure trader or seller of the part of the machineries to be utilized for commissioning of the TPD plant, but the assessee is having domain expertise of commissioning of such plants. 9.13 The Existence of service PE has not be denied by the assessee. In the case of the assessee, the employees of the assessee were in India at the time of entry of the part of the machinery on the Indian soil. Those employees were instrumental in supervising the entire activity of inspection of part of the machine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer has arbitrarily applied FAR analysis and benchmarking companies while computing the profit attributable. He further submitted that no basis has been given by the Assessing Officer to allocate profit of the company assigned to the Indian PE and the percentage of 35% adopted by the Assessing Officer is arbitrary without any rational. He submitted that in the case of Rolls Royce Plc (supra), sale of goods was through the liaison officer i.e. RRIL and it was remunerated for it. He submitted that RRIL carried out marketing activities in India on behalf of the Rolls-Royce PLC. According to the Ld. Counsel, however, in the instant case, two separate contracts have been awarded to the assessee company by the CPPC and there was no PE at the time of signing of the contract. According to him the deemed PE came into existence by virtue of rendition of the supervision services and therefore attribution of 35% of the profit from supply of the equipment based on the decision in the Rolls- Royce PIC(supra) was not justified as the company did not carry out any licensing or marketing activities in relation to supply of the equipment India. 10.2 Alternatively, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered office in London manufactured yarn and cloth in their mill at Pondicherry. The assessee had appointed a company in Madras at their agents. The manufactured goods were sold mostly in British India and partly outside British India. All the contracts in respect of the sales in British India were entered into in British India and deliveries were made and payments were received in British India. In regard to sales outside British India also, payments in respect of such sales were received in Madras through the agents. The assessee had shown the total world income for the year ended 30.12.1941 at ₹ 10,23,807. Profit at 10 per cent on British Indian sales which aggregated to ₹ 57,07,431 was shown at ₹ 5,70,743 and after deduction of the proportionate expenses relating to sales in British India and sundry charges was put down at the net figure of ₹ 4,58,026 which was shown as the British Indian income. It was, thus contended that the income arising in British India in the year of account did not exceed its income arising without British India and that therefore the assessee was non-resident in British India. This calculation of profits, at the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come attributable to the PE of the assessee in India. The Special Bench found that the assessee made global net profit of 10.8%. The aforesaid percentage was applied to the sales made to the Indian customer, and the resultant figure was held to be net profit arising in respect of the Indian sale. Having regard to the activities of the PE in India, 20% of the net profit in respect of the Indian sale w'as held to be income attributable to the PE in India. Reliance is further placed on the recent decision of the Uttarakhand High Court in the case of Samsung Heavy Industries Co. Ltd. vs. DIT: 265 CTR 109 in judgment dated 27.12.2013. The observation of the Court on the issue of attribution of income reads as 4. In paragraph 1 of Article 7 of the said Agreement, it has been provided that profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. It, therefore, recognizes two tax identities of an enterprise. The said paragraph makes it clear that the profits of the enterprise may be taxed in the other State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edged that it has also a tax identity in India. The question is, this identity is covered by which provision of the Agreement. In terms of paragraph 1 of Article 7, assessee will acquire its tax identity in India only when it carries on business in India through a permanent establishment situated in India. By submitting the return, assessee has held out that it is carrying on business in India through a permanent establishment situated in India. In the circumstances, the contention of the assessee, whether the Project Office of the assessee opened at Mumbai can be, or cannot be said to be a permanent establishment within themeaning of the said Agreement is of no consequence. In terms of the said Agreement, as it appears to us. if an enterprise does not have a tax identity in India in the form of a permanent establishment, it has no oblisation to either submit any tax return with, or payany tax to India. The question still remains, whether it was right on the part of the Taxing Authority to assess income-tax liability of the assessee as was assessed in the instant case. In other words, can it be said that the Agreement permitted the Indian Taxing Authority to arbitrarily fix a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian company constituted PE of the assessee in India since the assessee exercised substantial control and influence in the functional matters as is evident from the frequent and extensive visits of assessee s employees to India, secondment of assessee s employees to the key position in the Indian company and considering that the Indian company did not bear any substantial risk in relation to the functions carried out by in India. The Hon ble Tribunal while explaining the approach of computing profits attributable to such permanent establishment, held as under: 11.17. In view of the above facts, circumstances, case law, CBDT circulars and various articles of India-USA DTAA, following conclusions are arrived at: A. xxx xxx xxx F. In our considered opinion. the correct approach to arrive at the profits attributable to the PE should be as under: Step 1: Compute Global operating Income percentage of the customer care business as per annual report/1 OK of the company. Step 2: This percentage should be applied to the end-customer revenue with regard to contracts/projects where services were procured from CIS. The amount arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... looked and result become very vague and distorted. Therefore, the method adopted by assessing officer cannot be relied on as most appropriate method. 11.21. Apropos CIT(A) s estimate about attribution, though he accepted the proposition that there cannot be notional addition to India revenue, however, CIT(A) s method also does not become a rational inasmuch as the various expenditures incurred by CMG i.e. research development, depreciation, amortization etc. have not been considered and 50% of selling, general and administrative expenses have been ignored along with other expenses incurred by CMG outside India for earning the revenue from end customers. In our considered view, this approach is also not viable and appropriate. 11.22. As the methods for calculating the attribution profit as adopted by TPO and CIT(A) are not reliable. Ld. Counsel has further demonstrated that if both the methods are harmoniously applied, this leads to a situation where no further attribution to the assessee s income can be made. Thus a harmonious intermixed rationalization of TPO and CIT(A) method results into no further attribution of profits to Indian PE. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit out of the supply agreement has been assigned by the assessee towards the service PE. In the supply agreement, the assessee has supplied mainly parts or the components of the machines and those machines or sections of the plants have been assembled in India. As we have already concluded that for all practical purposes the property in goods transferred in India and thus PE has played role in supply agreement other than design, build and manufacturing of the components of the machines. Therefore, the significant part of the profit on offshore supply of equipment under supply agreement need to be attributed to PE in India. In the case of the Rolls-Royce PLC (supra), Hon ble High Court taken into consideration the role 50% toward manufacturing activity and 15 % towards the research and development activity and balance 35% was considered to the marketing activity. The relevant finding of the Hon ble High Court is reproduced as under: In the Rolls Royce case, the assessee was a British company. It supplied certain parts and equipments to Indian customers. Rolls Royce India Limited ( RRIL ) was 100 per cent subsidiary of assessee set up in India, which rendered liais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rolls Royce PLC. However, in the instant case, two separate contracts have been awarded to the appellant company by CPP and there was no PE at the time of signing of the contracts. The deemed PE came into existence by virtue of rendition of supervision services. Accordingly, attribution of 35% of the profits from the supply of equipment based on the decision in Rolls Royce PLC (supra) is unjustified as the appellant company did not carry out any liasoning or marketing activities in relation to the supply of equipment in India. 10.4 In the instant case, in addition to the marketing activities or engineering survey pre or post awarding of contract (for which no information has been filed by the assessee), the service PE has played role in assembling and bringing the equipment to deliverable state as agreed under the supply agreement. In such facts and circumstances, in our opinion, the 35% of the profit attributed to the PE is justified. Accordingly, we uphold the same. 11. The ground No. 4 of the appeal relates to interest as under section 234A/234B/234D of the Act. The Learned Counsel of the assessee has submitted as under: Re: Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax at source before making remittances to the nonresident assessee. The relevant extracts of the decision are reproduced hereunder: 22. This Court, therefore, holds that Jacabs (supra) applies in such situations; Alcatel Lucent (supra) can be explained as a decision turning upon its facts; its seemingly wide observations, limited to the circumstances of the case. This Court, therefore, holds that the view taken by ITAT was correct; the primary liability of deducting tax for the period concerned, since the law has undergone a change after the Finance Act, 2012) is that of the payer. The payer will be an assessee in default, on failure to discharge the obligation to deduct tax, under Section 201 of the Act. 23. For the above reasons, this Court finds that no interest is leviable on the respondent assessees under Section 234B, even though they filed returns declaring NIL income at the stage of reassessment. The payers were obliged to determine whether the assessees were liable to tax under Section 195(1), and to what extent, by taking recourse to the mechanism provided in Section 195(2) of the Act. The failure of the payers to do so does not leave the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he its income, if tax was not deducted by the deductor, and accordingly, the Assessing Officer is justified in levy of interest under section 234B of the Act . 11.2 We have heard rival submission of the parties on the issue in dispute. The learned Counsel has submitted that proviso below the section 209(1)(d) of the Act is prospective in nature. The learned Counsel has also relied on the decision of the Hon ble Delhi High Court in the case of DIT Vs GE Packaged Power Inc.(supra). The Hon ble High Court has observed that in view of the change after the Finance Act, 2012 it was primary liability of the payer to deduct tax and he would be an assessee-in-default, on failure to discharge the obligation to deduct tax under section 201 of the Act. But the instant case is prior to the amendment or change brought by the Finance Act, 2012. In the case of Alcatel Lucent World Services (ITA No. 326/2012, 329/2012 and 336/2012), the Hon ble Delhi High Court has reproduced facts of the case as under: 5. The Assessing Officer however did not accept the assessee's stand and in the assessment order passed on 23.03.2010 attributed 2.5% of the sale proceeds of the hard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, this court held that Section 195 places an obligation on the payer to deduct tax at source at the rates in force from the payments made and if the payer has defaulted in deducting the tax, it was open to the Income Tax Department to take action against the payer under Section 201 of the Act, but no action can be taken for recovery of the interest under Section 234B from the non-resident assessee. It was further held in this decision that the non-resident will, no doubt, be liable to pay the income tax on the income assessed upon it, but it cannot be held liable for payment of any advance tax thereon if the tax deductible by the payer in India exceeds the amount of advance tax payable on the estimated income. It was further held that the position would be so even if the income tax was not in fact deducted from the remittance because Section 209 (1)(d) of the Act permitted the non-resident assessee to take credit, while computing its advance tax liability, for the amount of income tax that was deductible from the remittance, though not actually deducted. It was furthermore held in the judgment that once it was found that the liability was that of the payer under Section 201 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect of the matter. This was in fact pointed out on behalf of the revenue also. It is open to the assessee to deny its liability to tax in India on whatever grounds it thinks fit and proper. Having denied its tax liability, it seems unfair on the part of the assessee to expect the Indian payers to deduct tax from the remittances. It is also open to the assessee to change its stand at the first appellate stage and submit to the assessment of the income. When it does so, all consequences under the Act follow, including its liability to pay interest under Section 234B since it would not have paid any advance tax. Such liabilities would arise right from the time when the income was earned. Advance tax was introduced as a PAYE Scheme pay as you earn . It is not open to the assessee, after accepting the assessment at the first appellate stage to claim that the Indian payers ought to have deducted the tax irrespective of the fact that the assessee itself claimed the Indian income to be not taxable. We can understand an assessee who admits its tax liability right from the beginning to contend that it was the responsibility of the payers to deduct the tax and if they did not, even the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the money, which would otherwise have been paid as advance tax, until it accepted the assessments at the first appellate stage. Where the revenue has been deprived of the use of the monies and thereby put to loss for no fault on its part and where the loss arose as a result of vacillating stands taken by the assessee, it is not expected of the assessee to shift the responsibility to the Indian payers. We are not to be understood as passing a value-judgment on the assessee s conduct. We are only saying that the assessee should take responsibility for its actions. 27. It is not unusual for the courts to invoke equitable considerations even while interpreting tax laws. In Jodha Mal Kuthiala v. CIT : (1971) 82 ITR 570 (SC), Hegde, J., opined thus: It is true that equitable considerations are irrelevant in interpreting tax laws. But, those laws, like all other laws, have to be interpreted reasonably and in consonance with justice . In CIT v. J.H. Gotla : (1985) 156 ITR 323 (SC), it was held by the Supreme Court that though equity and taxation are often strangers, attempts should be made (to ensure) that they do not always remain so and if a construction results in equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pair the purpose in introducing Section 10A in the Act. The return to be filed by the dealer is the full and correct return as referred to in Section 10 and on failure to furnish such a return the liability to pay interest from the prescribed date would arise when assessment is completed. 28. We think that the present case is one where such considerations should prevail in the interpretation of section 234B; otherwise, it will not merely result in injustice but the purpose of the provision would not have been achieved. In any case, the facts of the present case are different, as we have earlier pointed out, from the facts obtaining in Jacabs (supra) and therefore the said decision cannot be applied. 11.4 In the instant case also, the assessee has accepted the existence of the PE before the AO and in that circumstances, it cannot take benefit that it was the responsibility of the deductor to deduct tax at source. In view of facts of the case being identical to the facts of the above case, we don t find any error in the order of the Assessing Officer on the issue in dispute. Accordingly, the ground No. 4 of the appeal of the assessee is dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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